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Income Tax Appellate Tribunal, MUMBAI BENCHES “E”, MUMBAI
Before: SHRI R.C. SHARMA (AM) & SHRI RAM LAL NEGI (JM)
O R D E R
PER RAM LAL NEGI, JM
1. This appeal has been filed by the revenue against the order dated 30.10.2015 passed by the Ld. Commissioner of Income Tax (Appeals)-6, Mumbai, for the assessment year 1998-99, whereby the Ld. CIT (A) has allowed the appeal filed by the assessee against assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short ‘the Act’).
The facts of the case, in brief, are that the assessee filed its return of income for the assessment year under consideration declaring total loss of Rs. 1,46,90,560/-The assessee had borrowed a sum of Rs. 50,04,55,190/-during the previous year including Rs.44,04,55,190/- from its holding company M/s Tata Engineering and Locomotive Co.(Presently known as Tata Motors Ltd.). The assessee had made the following investments during the previous year:
2 Assessment Year: 1998-99 Sr. No. Name of the Company Amount invested Classification in (in Rs.) Balance Sheet 1. Matruchhaya Capital & 35,09,89,975 Long term Finance Ltd. (MCFL) investment 2. TATA Industries Ltd. 12,59,15,400 Long term (Tata Industries) investment 3. Tata International 5,61,30,000 Long term Limited (TIL) investment 4. HSEB Bonds (15.25%) 3,21,600 Other Investments.
The assessee incurred interest expenditure of Rs. 2,33,32,920/- on borrowed funds. During assessment proceedings, the assessee submitted that since the borrowed funds were utilized for making the said investments, the entire interest may be allowed as business expenditure u/s 36(1)(iii) of the Act. The AO rejected the contention of the assessee holding that investment made by the assessee are not in the nature of stock-in-trade and the expenditure was incurred for acquiring capital assets, which is not allowable u/s 36(1)(iii) of the Act. The AO further held that dividend earned from investments is since exempted deduction cannot be allowed u/s 57(iii) of the Act. In the first appeal, the Ld. CIT (A) disallowed the interest expenditure u/s 14A of the Act. In the second appeal before the ITAT, the Mumbai Bench of ITAT held that the provisions of section 14A of the Act is not applicable to the assessment year under appeal and set aside the issue for considering u/s 36(1)(iii) of the Act. The Ld. CIT (A) in setting aside proceedings heard the assessee at length and on the basis of the submissions made by the assessee in the light of the decisions of Hon’ble Supreme Court, Hon’ble High Courts and the decisions of various Tribunals decided the issue in favour of the assessee and directed the AO to delete the disallowance of Rs. 2,33,32,920/- holding that the interest paid by the assessee is allowable expenditure u/s 36(1)(iii) of the Act. The 3 Assessment Year: 1998-99 Department is in appeal before the Tribunal against the impugned order passed by the Ld.CIT (A).
The revenue has preferred this appeal before the Tribunal on the following effective grounds:-
“The order of the CIT (A) is opposed to law and facts of the case.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in the interest on the borrowed fund under section 36(1)(iii) of the IT Act, 1961, when the shares acquired were not shown as stock in trade but as investment? 3. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in allowing the interest on the borrowed fund under section 36(1)(iii) of the IT Act, 1961, when the money is not used for business purpose as held by the Assessing Officer. 4. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in allowing the interest on the borrowed fund under section 36(1)(iii) of the IT Act, 1961 relying on the judgment in the case of CIT v. Srishti Securities (P) Ltd.[2010] 321 ITR 498, without appreciating the factual position in the said case was that the assessee was an investment company whereas in the present case, it was not the business of the assessee as held by the Assessing Officer. 5. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in allowing the interest on the borrowed fund under section 36(1)(iii) of the IT Act, 1961, without appreciating the recent decision of Bombay High Court in the case of Crescent Organics (P) Ltd. Vs DCIT, Range-8(1), Mumbai [2014] 49 taxman.Com 128 (Bombay), 4 Assessment Year: 1998-99 wherein it was held that the judgment in the case of CIT v. Srishti Securities (P) Ltd [2010] 321 ITR 498 is clearly distinguishable and that such interest paid for non business purposes is not allowable u/s 36 (1)(iii).” 5. Before us, the Ld. Departmental Representative (DR) submitted that the Ld. CIT (A) has wrongly allowed the expenditure incurred on borrowed funds for making investments in question u/s 36(1)(iii) of the Act. The AO has rightly held that in the case of Srishti Securities P. Ltd. 183 Taxman 159. The assessee was an investment company, whereas in the present case, it was not the business of the assessee. The Hon’ble Bombay High Court in the case of Crescent Organics (P) Ltd. vs. DCIT-Range-80(1), Mumbai 2014 49 Taxman.com 128 (Bom), it was held that the judgment in the case of CIT vs. Securities P. Ltd. (supra) that interest paid for non- business purposes is not allowable u/s 36(1)(iii) of the Act. Hence, the findings of the Ld. CIT (A) are liable to be set aside.
On the other hand, the Ld. counsel for the assessee relying on the order passed by the Ld. CIT (A) submitted that since the Ld. CIT (A) has passed the order in accordance with the law laid down by the Hon’ble Supreme Court in Madhav Prasad Jatia vs.CIT 118 ITR 200 (SC) and the judgment of the Hon’ble Bombay High Court passed in CIT vs. Srishti Securities P. Ltd. 183 Taxman 159, therefore, there is no merit in the appeal of the revenue. The Ld. counsel further submitted that the facts of the case relied upon by the revenue are different from the facts of the present case, therefore, the ratio laid down in the said case are not applicable in the present appeal.
We have heard the rival submissions and perused the material on record. The only grievance of the revenue is that the Ld. CIT (A) has wrongly allowed the expenditure incurred on borrowings in question u/s 5 Assessment Year: 1998-99 36(1)(iii) of the Act. The Ld. CIT (A) has allowed the claim of the assessee holding as under:
“4.1 I have also gone through the provisions of section 36(1)(iii) of the Act and judicial precedents thereon. The precondition for deduction of interest under section 36(1)(iii) is that the capital should be borrowed for the purpose of business and interest should be paid thereon. The Apex Court in Madhav Prasad Jatia (supra) held that the expression “for the purpose of business” occurring in section 36(1)(iii) and also in section 37 is wider in scope than the expression “for the purpose of earning income, profits or gains” occurring in section 57(iii) and, therefore, the scope for allowing deduction u/s 36(i)(iii) would be much wider than the one available u/s 57(iii). The Hon’ble Supreme Court in Care Health Care Ltd. (supra) has observed that the Legislature made no distinction in section 36(1)(iii) between “capital borrowed for a revenue purpose” and “capital borrowed for a capital purpose.” An assessee is entitled to claim interest paid on borrowed capital irrespective of what may be result of using the capital which the assessee has borrowed. Hence, the utilization of funds whether on capital account or revenue account is not material. The Hon’ble Bombay High Court in case of Srishti Securities (supra) has considered identical issue and held that the interest on borrowed funds for acquiring shares, whether held as stock-in-trade or as investments, is allowable under section 36(1)(viii) of the Act. In the said case, the assessee company had borrowed funds which were utilized in its business of acquiring shares by way of investment as well as way of stock-in-trade. It paid interest on borrowed funds and claimed deduction thereof under section 36(1)(iii). The Assessing Officer disallowed the entire amount of interest paid on the ground that the object of acquiring shares was not to earn dividend but to acquire a controlling interest in the company. On appeal, the Commissioner (Appeals) divided the interest between investment and stock-in-trade on a pro rata basis and held that the assessee was entitled to deduction of interest to the extent borrowed funds were used for acquiring shares by way of stock-in-trade. On appeal, the Tribunal deleted the disallowance made by the Commissioner (Appeals) holding that if funds are borrowed by an investment company for making investment in shares which may be held as 6 Assessment Year: 1998-99 investment or stock-in-trade or for purpose of controlling interest in other companies, interest paid on such borrowed funds would be deductible under section 36(1)(iii). On appeal, the Hon’ble Court applying the ratio of several judgments held that the interest which was disallowed to the extent of investment would have to be allowed.
In view of the above decisions and the facts discussed above, the interest paid by the appellant of Rs. 2,33,32,920 is directed to be allowed under section 36(1)(iii) of the Act and the disallowance made by the AO is deleted. The ground is allowed.”
We notice that the Ld. CIT (A) has decided this issue in favour of the assessee by following the ratio of law laid down by the Hon’ble Supreme Court in Madhav Prasad Jatia vs.CIT and the judgment of the Hon’ble Bombay High Court passed in CIT vs. Srishti Securities P. Ltd. (supra) in Madhav Prasad Jatia case the Hon’ble Supreme Court has held that the expression for the purpose of business appearing in section 36(1)(iii) and section 37 is wider in scope then the expression for the purpose of earning income, profit or gains appearing in section 57(iii) of the Act. In the case of Srishti Securities P. Ltd. (supra), the Hon’ble Bombay High Court has considered the identical issue and held that the interest on borrowed funds for acquiring shares whether held as stock-in-trade or as investment is allowable u/s 36(1)(iii) of the Act. So far as the case relied upon by the revenue is concerned, in our considered view the facts of the said case are different from the facts of the case of Srishti Securities P. Ltd. (supra). Hence, the issue in this case is not covered by the case relied upon by the revenue. Taking into consideration, the entire facts of the case in the light of the cases relied upon by the Ld. CIT (A), we are of the considered view that the order passed by the Ld. CIT (A) does not warrant interference. We therefore do not find merit in the contention of the Ld. CIT (A). Hence, we uphold the findings of the Ld. CIT (A) and dismiss all the grounds of appeal of the revenue.
7 Assessment Year: 1998-99 In the result, appeal filed by the revenue for assessment year 1998- 1999 is dismissed.